Would Event Hospitality & Entertainment (ASX:EVT) Be Better Off With Less Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Event Hospitality & Entertainment Limited (ASX:EVT) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Event Hospitality & Entertainment

What Is Event Hospitality & Entertainment's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Event Hospitality & Entertainment had AU$386.3m of debt in June 2022, down from AU$476.2m, one year before. However, it does have AU$175.2m in cash offsetting this, leading to net debt of about AU$211.2m.

How Strong Is Event Hospitality & Entertainment's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Event Hospitality & Entertainment had liabilities of AU$454.6m due within 12 months and liabilities of AU$1.24b due beyond that. Offsetting this, it had AU$175.2m in cash and AU$66.1m in receivables that were due within 12 months. So it has liabilities totalling AU$1.46b more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of AU$2.28b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Event Hospitality & Entertainment can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Event Hospitality & Entertainment wasn't profitable at an EBIT level, but managed to grow its revenue by 61%, to AU$857m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Even though Event Hospitality & Entertainment managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost AU$31m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Surprisingly, we note that it actually reported positive free cash flow of AU$176m and a profit of AU$53m. So if we focus on those metrics there seems to be a chance the company will manage its debt without much trouble. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Event Hospitality & Entertainment you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.